I work as a Research Scholar at the Center for Health Policy and Inequalities Research at Duke University. I also am an Adjunct Scholar at American Enterprise Institute and Mercatus-Affiliated Senior Scholar. Having been trained in policy analysis at the Pardee RAND Graduate School, I have decades of experience in evidence-based health policy at the federal and state level, specializing in health services regulation and the social burden of illness. I've taught health policy and the politics of health care in the Terry Sanford Institute of Public Policy, the Duke School of Medicine and the Fuqua School of Business at Duke. My latest book is "American Health Economy Illustrated."

The author is a Forbes contributor. The opinions expressed are those of the writer.

Young People Under Obamacare: Cash Cow For Older Workers

It’s official: the health care law will unduly stick it to young Americans by making them pay far higher premiums starting January 1, 2014.[1] New rules announced this month are even worse than expected when it comes to shoveling an unfair burden onto our nation’s youth. Moreover, they also perversely increase the incentives of young people to remain uninsured.

The newly announced rules limit insurers to charge their oldest customers no more than three times as much as younger ones. As shown in the following chart based on estimates by international management consulting firm Oliver Wyman, the rule will force insurers to hike rates for 18- to 24-year-olds by 45 percent even as rates for those 60 and older drop by 13 percent in most states.[2] That means a 22-year-old waitress paying $2,068 for her health insurance will have to fork over $3,000 when Obamacare takes effect.[3] And these figures even underestimate the actual impact.

Analysts based these estimates on average premiums for 5-year age groups (i.e. 55-59, 60-64, etc.). However, the new rules say that the restriction must apply to 1-year age groups (i.e. 25, 26, 27, etc.). Since health spending rises steadily by age—about 3.5 percent per year between 25 to 64—expected spending for 64 year-olds is higher than for the 60-64 year-old age group as a whole. That means insurance companies will have to charge 18-year-olds at least 10 percent more using the 1-year age groups to ensure their premiums fall within the mandated range of those of 64 year-olds.

The real-world consequence of this regulatory misjudgment is that young people will have an even greater economic incentive to simply pay the $695 annual penalty for not having coverage and wait until they are sick before they purchase it. [4] In short, it is now even more likely that Obamacare will amplify the perverse incentives for “free-riding” that it was intended to counter.

Clearly, until we observe actual behavior next January, we won’t know precisely how large an adverse selection problem has been unnecessarily created by these new rules. But what we can say for certain is that for young adults who elect to have health coverage, it will be way more expensive next year than it is today.

Is this fair? Ask the typical 20-24 year-old—whose median weekly earnings are $461—whether it’s fair to be asked to pay 50 percent higher premiums so that workers age 55-64—whose median weekly earnings are $887—can pay lower premiums. Think about that. The median earnings for older workers are $420 a week more than those of younger workers, or roughly $20,000 more a year. How is mandating a price break on health insurance for this far higher income group at the expense of the lower income group possibly fair?

The difference in mean health spending for those age 45-64 and those age 18-24 is a mere $4,100—less than $350 a month.[3] In short, the group benefiting from this transfer earns enough extra in a single week to cover the expense of their high health insurance premiums. I’m in the age category that would benefit from this type of transfer, yet even I can see how grossly unfair it is to the typical young worker.

As well, this unnecessary and undesirable feature of Obamacare is complicating discussions about how to reform Medicare. One very logical tweak to the program is to raise the age of eligibility to age 67 (so that it matches the eligibility age used for Social Security). After all, life expectancy at age 65 has risen by 4.5 years since Medicare’s inception. But because of the restrictions placed on premiums under Obamacare, such a simple change would require the premiums of young adults obtaining coverage through the exchanges to increase by at least eight percent, according to a Kaiser Family Foundation study.

This is what comes of “taxation by regulation.” If older people truly are deserving of help in paying for their premiums, then we should be relying on honest and open subsidies to assist them. This would permit the burden to be borne by society in general in a fashion that we can agree is distributionally fair. In contrast, loading all of these generational cross-subsidies onto young people is manifestly unfair. When we see “Occupy Obamacare” protests, we’ll know that young people have finally figured this out.

English: In the United States, Medicare benefits compared for younger vs. older workers. According to author Joseph Fried, this graphic uses information from: C. Eugene Steuerle and Adam Carasso, "The USA Today Lifetime Social Security and Medicare Benefits Calculator," (Urban Institute, October 1, 2004), from: http://www.urban.org/publications/900746.html. Note: The calculator does not include the value or cost of the Social Security disability program. (Photo credit: Wikipedia)

published 2/15/13 observes: “First, the country’s existing entitlement programs are not just unaffordable, they are also profoundly unfair to those who are taking their first steps in search of opportunity. Social Security is one example. According to Social Security actuaries, the generational theft runs deep. Young people now entering the workforce will actually lose 4.2% of their total lifetime wages because of their participation in Social Security. A typical third-grader will get back (in present value terms) only 75 cents for every dollar he contributes to Social Security over his lifetime. Meanwhile, many seniors with greater means nearing retirement age will pocket a handsome profit. Health-care spending through Medicare represents an even less equitable story.

[2] Many states already place restrictions on age rating in the individual insurance market (as codified in the Oliver Wyman report), but use a much more generous 5:1 ratio, which does not distort pricing nearly as much given that there is a 6:1 ratio of spending for older compared to younger individuals. In an unregulated market, we would expect premiums to mirror the 6:1 ratio of expected spending for these two groups so that each age cohort effectively self-financed its own spending, just as we observe in markets for life insurance, long term care insurance and auto insurance. The chart shown shows the increase in rates required for each age category to move from a 5:1 maximum ratio to a far more restrictive 3:1 ratio.

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until I looked at the check 4 $7220, I did not believe …that…my neighbours mother was realie bringing in money part time online.. there sisters neighbour started doing this 4 less than 18 months and at present repayed the mortgage on their appartment and bourt a brand new BMW 5-series. this is where I went, http://ace60.cℴm

So if you pay a penalty through the IRS, where does that money go? I bet it doesn’t go into the healthcare system. I think Timothy Geithner has another real cash cow for the “treasury” here! To be stolen by our congress critters to send aid overseas? To bail out the post office or Fannie Mae/Freddie Mac or Goldman Sacs? Loans to companies going bankrupt? Pay for their own raises or retirement? Etc

Well, you’re right. The money isn’t “dedicated” to health care the way Social Security and Medicare payroll taxes are (although the latter hasn’t stopped Congress from raiding these “trust funds” for decades). That said, Obamacare is so woefully underfunded that even if every dollar WERE dedicated to be spend exclusively on the Affordable Care Act, we still would end up borrowing to finance current spending on this massive new entitlement. This tab ultimately will be borne by today’s young workers in the form of higher taxes in the future or in the form of severe cutbacks to their Medicare benefits once they retire. So young people–include those yet unborn–are being flagrantly victimized by this mentality of robbing young Peter to pay old Paul as invisibly as possible.

The amount of money expected to be collected by the fines will be trivially small. 85% of Americans already have health care insurance so they will pay no penalty. Most people who do not have health care insurance will want the insurance and so will not pay any fine.

My post said absolutely nothing about fines. My concern is how premiums are being regulated under Obamacare. Essentially, the rules impose a hidden tax on young people to cross-subsidize their elders. I have explained quite clearly why I believe this is both unfair and inefficient. Pointing to the fines is a complete red herring that is completely irrelevant to the issue I’ve raised.

I don’t think younger workers will figure this out any time soon. So since younger voters voted for Obama overwhelmingly in 2008 and 2012, we can just refer to Obamacare as a tax on stupidity…. I used to reserve that term for state lottery.

David, of course they will want it, but I think it’s a safe bet that those that don’t have insurance right now is because they can’t afford it. What — slap the name Obamacare on an insurance policy and suddenly they have an extra couple hundred dollars a month in their budget?

That was pretty slick the way you snuck in that reference to the Thermodynamics book. I’ve never read anything that fancy, but I went to the county fair and saw a goat get milked once. Say, why don’t you mosey on over to the Government Printing Office’s website so you don’t have to keep guessing about its length? That out-of-print tome was 978 pages long: http://bookstore.gpo.gov/actions/GetPublication.do?stocknumber=052-070-07597-0

Or look at the PDF file here: http://www.gpo.gov/fdsys/pkg/PLAW-111publ148/pdf/PLAW-111publ148.pdf That one is 906 pages long. Like you say, it “varies with edition.” Why, I bet if the science book publishers used wide margins like those lawmakers, you could’ve bragged about having a 1000-page Thermodynamics book.

I guess that you are not overly familiar with how insurance works. All insurance programs combine low risk and high risk policies into a pool and then balance the risks and, hopefully, produce a profit.

If I buy life insurance, my premiums go into pool with other policy holders. The policy is a contract, if I die before the end of the term, my designated beneficiary receives a payment of the agreed upon face value of the policy.

Now if I die after just one payment, the payout is exactly the same as if I paid in for 20 years. The money that my beneficiary gets is far greater than the sum of all my payments. That money comes from the common pool of money that all policy holders contribute to. Is my beneficiary “entitled” to the money even though he or she is receiving much more than I paid in, even though the other policy holders may pay into the pool for many years and some will never collect anything?

This works by balancing the odds of people dying at any given age and the cost of the premium and the face value of policies. So long as more people survive past the term of the policy than die before it, the company makes a profit (it is of course far complicated than this it will due).

This feature is not all unique to the PPACA (aka “Obamacare”) but is inherent in all insurance.

Thank you for that amazing explanation of insurance… Did you copy that from Wikipedia? Seriously, I am pretty confident that the author knows that much about insurance.

Like you said, insurance companies pool high- and low-risk people together. Every type of insurance charges high-risk people more. Young males pay more in car insurance, for example. What this law has done is make the low-risk group pay more for the high-risk group. So before you start quoting “how insurance works,” keep in mind that this law has completely changed the game.

You wrote:“Seriously, I am pretty confident that the author knows that much about insurance.

I would have thought so as well yet reading his would indicate that the contrary is true. Consider merely the title of the blog:“Young People under Obamacare: Cash Cow for Older Workers”. Had the author read the Wikipedia article or something similar and understood it, he would not have written such a blog. Young people are low risk in regards to health care risks while older people are high risk.

As you note, all insurance companies would pools those risks, that is what they do. Yet Mr. Conover writes as if were some strange, exotic, or even unethical practice. Anyone familiar with insurance would not present this information in this way.

You wrote:“So before you start quoting ‘how insurance works,’ keep in mind that this law has completely changed the game.

The PPACA has not changed “how insurance works”. The PPACA only requires that people purchase insurance, the insurance is still being provided by the same providers that did before. 85% of Americans have health care insurance right now, these Americans will have the same insurance carriers after August 2014 as before. They will see the same doctors who will bills the same carriers.

What will change is that the 15% of American who do not have insurance will have it. That does nothing to change “how insurance works”.

Corey, you are exactly right. Most other forms of insurance–automobile, life insurance etc.–are “actuarially fair” meaning that premiums reflect known risks. Thus, no one objects to young male drivers paying higher insurance rates since everyone knows that as a group, they statistically have much higher odds of being in an accident. Likewise, premiums for life insurance steadily rise by age, but everyone understands that this merely reflects the steadily increasing risk of death with age.

Voluntary insurance markets are not intended to pool risks that have already happened, something eloquently explained in Mark Pauly’s book Health Reform Without Side Effects http://media.hoover.org/sites/default/files/documents/9780817910440_1.pdf which I commend to anyone wishing to understand these issues better. Thus, 17-year-old males as a group have a higher risk of auto accidents, but we don’t know ex ante which particular 17-year-old will crash. In the auto insurance industry, 17-year-old males are charged a premium designed to cover the costs of 17-year-olds as a group, meaning that “high risk” 17-year-olds (the ones who actually crash) are cross-subsidized by their peers who drive more carefully. This may not seem fair, but to the degree the insurance industry can deduce which 17-year-olds are safer drivers than others (e.g., based on their grades), it has a great incentive to decompose this group into even finer insurance categories so that everyone pays as close to their expected costs as feasible.

If we for some reason think it is unfair for older people to pay higher health insurance premiums (and for working age adults, this is not obvious given that wages also tend to rise with age), then we ought to honestly and explicitly subsidize their premiums rather than doing so covertly by using regulation to force subscribers to pay far above actuarially fair rates to achieve this purpose. The reality is, not every near-retiree needs assistance in paying for health insurance, so means-tested subsidies would be the most efficient (i.e., minimizing the amount of subsidies required) and equitable way of achieving this. The Obamacare insurance pricing rules are grossly inefficient (giving subsidies to ALL near-elderly individuals, even people who don’t need them) AND grossly unfair (loading the cost of these subsidies on the age group with the least earning power).

You wrote:” Likewise, premiums for life insurance steadily rise by age, but everyone understands that this merely reflects the steadily increasing risk of death with age.”

That is not true. If I buy a term or even whole life insurance policy, my premium remains the same for the life of the policy.

You wrote:“If we for some reason think it is unfair for older people to pay higher health insurance premiums (and for working age adults, this is not obvious given that wages also tend to rise with age), then we ought to honestly and explicitly subsidize their premiums rather than doing so covertly by using regulation to force subscribers to pay far above actuarially fair rates to achieve this purpose.”

This is exactly how health insurance works right without the PPACA. The PPACA does not mandate that all policy holder pay the same premiums. It merely requires everyone obtain a health insurance policy, it does not mandate equal premiums.

I would only add, that based upon the success of Romneycare in Massachusetts, there are greater set of benefits that will accrue to society as a whole. Romneycare has successfully reduced the insurance rates in Massachusetts.

“Overall the Massachusetts reform has gone very well and it’s done everything it was designed to do. We lowered premiums in that market by about 50 percent relative to the national trend. Overall it’s been very successful. It’s not been successful in what it didn’t try to do- in that it didn’t try to control cost and it doesn’t.”

Pr. Jonathan Gruber, a professor of economics at MIT.

Further, In 2006 the rate of non-elderly uninsured residents in Massachusetts without health insurance coverage was 10.9 percent, while today 98 percent of Massachusetts residents are insured in general but for children it is 99.8 percent and 99.6 of seniors are insured. In the US today, the uninsured rate is over 15%.

Forbes.com is full of bloggers predicting that the sky will fall in August 2014 however all the interested reader need do is look at what has happened in Massachusetts since Romneycare went into effect.

David, your allusion to term life insurance misses the point. Yes, life insurers allow you to “lock in” your premium for 5 or 10 or 15 years. That does not negate the fact that at any given starting age, the premium they charge will be much higher for a 64 year old than a 20 year old. The same was true in the individual market before Obamacare. You can check some sample rates at ehealthinsurance.com if you don’t believe me.

I never said Obamacare mandated equal premiums. It merely mandates that young people be overcharged so that older people can be undercharged. That’s what the 3:1 age rating restriction implies. That is unfair for reasons I have described. You can agree or disagree with my assessment, but it’s not fruitful to claim I made arguments that I didn’t.

As for Massachusetts, I’m glad that Prof. Gruber is willing to concede that Romneycare doesn’t control costs (because it didn’t try). Now try to square that claim with his claim that “We lowered premiums in that market by about 50 percent relative to the national trend.” If health costs didn’t go down, then how could individual health insurance premiums have gotten lower? More importantly, this is the opposite of what CBO projected for Obamacare. CBO estimates that Obamacare will INCREASE premiums in the individual health insurance market by 10-13 percent (above the levels that otherwise would have prevailed). These increases result from a combination of a) forcing people to obtain more generous coverage than they voluntarily were doing prior to Obamacare; and b) forcing insurers to take all comers, including those with pre-existing conditions.

Prof. Gruber was paid hundreds of thousands of federal tax dollars as a consultant to the Obama administration. He also played an important role in designing Romneycare. He is a talented health economist, but he is far from a neutral observer. In contrast, CBO has a well-deserved reputation for non-partisan, competently executed analysis. Given a choice between Prof. Gruber’s rosy estimates about MA and CBO more sober assessment of the adverse effects of Obamacare, I will choose the latter.

MA admittedly has assuredly lowered its uninsured rate relative to both its historical average and the rest of the U.S. In that regard, it has been successful. Obamacare, in contrast, does not even attempt to be nearly as successful, as there will continue to be tens of millions of uninsured even after the plan is fully implemented. My claim has never been that Obamacare will achieve nothing. It’s simply that I believe its modest gains are not even remotely comparable to its considerable costs.

You wrote:“These increases result from a combination of a) forcing people to obtain more generous coverage than they voluntarily were doing prior to Obamacare; and b) forcing insurers to take all comers, including those with pre-existing conditions.

Most people do not chose their coverage. Most people have their health insurance chosen for them by their employers. What both Romneycare and Obamacare do is increase the minimum coverage that an employer can provide. So premiums are larger because they are getting more services.

Requiring insurance providers to provide insurance to everyone is a very good thing, that way no one will be without it.

In August of 2011, the Ohio Department of Insurance retained Milliman, a well known actuarial consulting firm, to estimate the impact of Obamacare on the private insurance market. The study examined several different markets, including Employer Sponsored Insurance (ESI)

“Prior to the application of the premium tax credit subsidy, the individual health insurance market premiums are estimated to increase by 55% to 85% above current market average rates (excluding the impact of medical inflation)…This is attributable to today’s individual market having leaner covered benefits, such as the exclusion of maternity services, and a lower-cost population relative to the ESI markets.”

In other words, premiums will go up by 55% to 85% (not taking into account the government tax credit subsidy!) for those individual who purchase health insurance individually (only 537,000 non-elderly people in Ohio do this in a state of 10,000,000 non-elderly), or about 5% of the non-elderly population. Of course once these individual take advantage of the tax subsidies the increase will not actually be nearly that large.

Small ESRI premiums will also increase, but by 5% to 15%. According to the report…”This is primarily driven by the estimated health status of the remaining ESI-small group market, ACA-imposed insurance carrier fees, and provider cost shifting from the public programs.” This is due to people who were on Medicaid or who were ineligible for insurance entering the Small ESRI market. In 2014 there will be 667,000 (6%) people in this market in Ohio.

Large ESRI premiums are expected to increase 3% to 5% This was also driven by people who were on Medicaid leaving that program and now being insured by their employers. 834,000 (8%) of Ohio’s population would be in this market.

Some people will experience premium increases but others will see decreases. Some people will get more coverage than before, some will have coverage that they did not have at all, but no one will see a decrease in coverage.

The benefits over all will be a reduction in health care cost because of prevention of diseases which is less costly than treating the disease.

Let me make this simple. Let’s assume that actuarially fair premiums for 64 year olds are $600 while those for 20 year olds are $100, i.e., a 6:1 ratio. These are the rates we would observe in an unfettered market. You could claim these are “unfair” but remember that they would be reflecting the expected health spending by each group. 20 year olds would pay $100 and get roughly $100 in medical care (minus whatever administrative cost was associated with their coverage) and 64 year olds likewise would pay much more, but also get much more in expected paid benefits from their policy.

Now imagine that Uncle Sam comes along and restricts the ratio to 3:1. So assuming an equal number of 20 year olds and 64 year olds in this simplified example, this would require the insurer to collect $150 from the 20 year old(s) and $450 from 64 year old(s). Premiums for the former would have gone up by 50 percent while premiums for the former would have dropped by 25%. This isn’t “fair” because young adults would end up paying $150 to obtain less than $100 in expected benefits while older adults would pay only $450 to obtain nearly $600 in expected paid claims etc.

First, let me note that the Gruber figures that David has cited do not account for the increase in premiums related to requiring insurers to take all comers, including those with pre-existing conditions. http://www.forbes.com/sites/aroy/2012/09/25/jonathan-grubers-new-analysis-of-obamacare-and-romneys-health-reform-plan/

Second, the Wyman numbers already account for the higher cost of covering those with pre-existing conditions since they simply were comparing what premiums would be in a world with a 3:1 age rating restriction to a world where states already imposed a 5:1 age rating restriction. In the latter world, insurers also are required to take all comers, but the cross-subsidies from young to old are much more modest, since a 5:1 age rating band is much closer to the 6:1 or 7:1 ratio that would be observed if premiums were actuarially fair.

Third, to give you a “back-of-the-envelope” feel for the impact of the guaranteed issue requirement (i.e., forcing insurers to take people with pre-existing conditions without allowing them to charge higher rates), Wellpath estimates this would increase its rates for young subscribers by 50%. In contrast, the 3:1 age rating restriction would increase the rates by “only” 32%. http://www.wellpoint.com/prodcontrib/groups/wellpoint/@wp_news_research/documents/wlp_assets/pw_d014997.pdf

My colleagues and I in the field of clinical case management have agreed anecdotally that we do not come across plans with pre-existing clauses (and these are adults, so it’s not b/c Ocare passed–that only addressed pediatric patients in the first stages). I’ve worked in the fields of clinical care and health care policy for 25 years and I’ve yet to see someone “dropped” because a pre-existing condition. If it happens, it’s extremely rare. The use of it as a huge bargaining point for Ocare was, IMO, intellectual dishonesty as the threat of it was purportedly much more than anything we’re seeing in reality.What I’ve seen is ins plans accepting any conditions as long as they were covered w/out a lapse. This prevents the risk of someone neglecting their responsibility until he/she is so far gone in terms of illness that they suddenly want the ins. plan to cover the damage. (and it’s not really unfair, IMO) Does anyone have any real experience coming across a pre-existing clause? Maybe they’re out there and I just haven’t come across them (?)